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GAAP requires absorption costing, but absorption costing creates an incentive to overproduce. Variable costing decreases the...

GAAP requires absorption costing, but absorption costing creates an incentive to overproduce. Variable costing decreases the incentive to overproduce, but variable costing is not GAAP. Why do you think variable costing is not compliant to GAAP?

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Answer #1

Variable costing product cost consists of variable manufacturing costs –direct materials, direct labor and variable manufacturing overheads. Product cost as per GAAP consists of – direct materials, direct labor, variable manufacturing overheads and fixed manufacturing overheads. Hence Absorption costing product cost is in compliance with GAAP requirement. But Variable costing product cost is not in compliance with GAAP requirement since fixed manufacturing overheads is treated as period cost and charged to the income statement in which it is incurred and not part of product cost.

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